Plan for Tomorrow | Five surprising uses for an annuity
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Five surprising uses for an annuity

Jun 4, 2024, 3:09:50 PM | Reading Time: 6 minutes

Many workers wish to grow their savings for retirement and turn those assets into an income stream down the road. Annuities are a common way to accomplish this goal and can supplement a retirement income plan with helpful benefits. While annuities are commonly used as a reliable source of retirement income, there can be other ways to use these products. If supplemental income is no longer needed, there may be other ways to use an annuity. Here are five unexpected ways you may want to consider.

Can an annuity be cashed out?

If income payments have not begun yet, it may be possible to cash out or withdraw money from an annuity, but withdrawals may come with a fee. Some retirees may have other reliable income sources or want flexibility and need to maintain access to their funds. However, taking early withdrawals or cashing out an annuity could delay future goals, especially if a person is nearing retirement. Options for accessing funds from an annuity include: 

1. Loans

Instead of cashing out an annuity, a loan against the cash value of the annuity contract may be an option. A loan may be needed for an emergency, medical expenses, or home repair. 

2. Withdrawals

Some annuities offer an annual penalty-free withdrawal amount1, while others have specific features that can trigger additional liquidity options if certain conditions are met, like an extended nursing home stay. 

3. Surrender

Someone may terminate their annuity contract before the payout period. However, there may be a fee if funds are withdrawn before a predetermined date, known as the surrender period.

Unexpected uses for an annuity

Along with providing a “retirement paycheck,” annuities can offer the right mix of growth potential and protection for retirement assets, but what if supplemental income is no longer needed? Annuities can be used for long-term considerations like life insurance or health care and to secure a stable legacy for potential heirs and causes close to your heart.

Opting for an annuity maximization1. Opting for an annuity maximization strategy

One strategy for maximizing annuity dollars is to purchase a life insurance policy with the annuity funds. The policy's beneficiaries would then be paid a generally tax-free death benefit and avoid the taxes associated with inheriting annuity funds. Annuities are subject to income taxes and estate taxes after the owner dies, so the annuity cash value could be severely reduced after beneficiaries are hit with tax liabilities. On the other hand, life insurance provides a generally income tax-free death benefit. It can be structured to be excluded from the taxable estate — helping maximize the value to one’s heirs.

Repurposing for long-term care2. Repurposing an annuity for long-term care

Some people may anticipate needing assistance with long-term care expenses for themselves or a loved one in the future. One option to prepare for these costs is transitioning from a current annuity to an annuity with long-term care benefits. This strategy can allow an annuitant to repurpose an annuity that is unnecessary for income needs since annuity funds can still be eligible for tax benefits while allowing assistance with long-term care costs.

Thinking through an annuity for medicaid3. Thinking through an annuity for Medicaid planning

Certain annuities are considered Medicaid compliant, where income from that annuity is not counted toward the asset limit to qualify for Medicaid. To be eligible for Medicaid long-term care, applicants must have limited assets. A Medicaid Compliant Annuity (MCA) is one planning option that can potentially lower total assets, where countable assets are converted into non-countable or exempt assets. Since this money is turned into an income stream, it does not count against the asset limit to apply for Medicaid.

Placing an annuity in a trust4. Placing an annuity in a trust

To add to an estate planning strategy, placing an annuity in a trust and gaining greater control over how annuity proceeds are distributed may be possible. This may help minimize estate taxes and can be particularly useful for ensuring that the funds are used for specific purposes — like providing for a beneficiary's long-term financial security or receiving regular income.

Gifting an annuity to loved ones5. Gifting an annuity to loved ones or a good cause

A contract between a donor and a qualified charity is known as a charitable gift annuity and can be an option for someone who wishes to donate to a favorite cause. Often called a “split gift,” part of the donation is used by the charity, and part of the gift is set aside to provide income payments to the donor and/or their beneficiary for the rest of their lives. A charitable gift annuity may be a good choice if a person is looking for a charitable tax deduction but also wants to have retirement income they can count on later in life. It’s important to speak with a tax professional about the tax deductions and possible benefits of this strategy.

Gifting an annuity to a family member

An annuitant may also have the option to gift their annuity or change the contract owner to a family member or other beneficiary. The new owner takes control of the annuity and its benefits. If the annuity is in the accumulation phase when it is gifted, taxes on any gains will likely need to be paid. However, waiting until the annuity’s payout phase before it is gifted can provide the recipient with a tax-free source of lifetime income. Gifting an annuity can be a generous and beneficial gesture, but it's important to approach it with careful consideration and to seek professional advice to ensure it's the right choice for both you and the recipient.

Understanding annuity basics and beyond

Since everyone’s needs and risk comfort differ, meeting with a financial professional can help you understand your options and land on a strategy that works for you. In addition to bringing greater financial security to retirement, annuities can offer growth potential as well as help grow assets to pass on to loved ones or provide funds for unexpected events. Whether your needs are more straightforward or you’d like to explore the unique uses for an annuity, the help and guidance of a financial expert can get you on the path toward a happy retirement.

1 Withdrawals taken prior to age 59 1/2 may be subject to IRS penalties.

The term financial professional is not intended to imply engagement in an advisory business in which compensation is not related to sales. Financial professionals that are insurance licensed will be paid a commission on the sale of an insurance product.